What Are The Long Term Consequences Of The Brexit

We begin with a look at the key data for the oil and gas industry this week, which shows the impact of the Brexit vote on the oil markets, with crude prices falling shareply. Meanwhile, U.S. gasoline prices have fallen and refinery runs have broken their fall, heading upwards this week.

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(Click to enlarge)

(Click to enlarge)

Friday, June 24, 2016

British voters shocked the world with yesterday’s vote to leave the European Union, thrusting the global financial markets into turmoil. British Prime Minister David Cameron said that he would step down later this year. The “Leave” decision also presents enormous political, economic, and legal questions in Europe, all bad news for commodity markets. The campaign to exit Europe centered largely on immigration, but the fallout will be felt across many sectors of the global economy. In the short run, the dollar is appreciating as a safe haven asset and the British pound is suffering a large sell off. The pound was down more than 11 percent after the result of the vote was tallied, trading at its lowest level to the dollar since 1985, although it has clawed back some of the losses.

The result will be lower oil prices, at least in the immediate aftermath of the vote. WTI and Brent briefly plunged more than 5 percent in early market trading on Friday, but have regained some lost ground. Major oil companies also saw their share prices dive, both because of the broader financial turmoil and because of the huge drop in oil prices. North Sea oil producers suffered worse than others: In early trading Royal Dutch Shell (NYSE: RDS.A) was down 5.35 percent, Statoil (NYSE: STO) was off 6.15 percent, and BP (NYSE: BP) dropped 4.13 percent. The silver lining for these companies could be cheaper costs in the North Sea from a weaker British pound, but that may not provide much solace to many oil executives today.

The fundamentals of supply and demand for crude oil will not appreciably change due to a Brexit. Unless the UK’s decision to leave Europe sparks wider economic malaise or lasting financial turmoil, the effects on oil could be fleeting. On the other hand, it is entirely possible that the UK’s decision to leave Europe leads to more votes in other European countries to follow in Britain’s footsteps, which will spark more economic volatility. “This could be a new Lehman moment,” Saker Nusseibeh, chief executive at Hermès Investment Management, told The Wall Street Journal. “If other European countries start talking about referendums, all bets are off.” Stock indices in southern Europe suffered even worse than the UK’s FTSE 100 (-3.66 percent) – in Greece the markets were down 13.8 percent, Spain’s were off 12 percent, and Italy’s stock market was down 11 percent. At a minimum, the divorce between Britain and Europe will take some time, perhaps as long as two years, so market uncertainty will not be abated anytime soon. Related: NASA May Have Just Transformed Aviation With 100% Electric Plane

Scotland independence? The Brexit vote increases the chances that we will see a rerun of the campaign for Scottish independence. The June 23 Brexit vote showed overwhelming support in Scotland to remain in the EU, so Scottish politicians have a strong case to breakup from the UK in order to remain in Europe. Of course, if Scotland were to breakup with the UK, it would have massive ramifications for North Sea oil, arguably more so than the Brexit. The separation of the UK from Europe won’t have significant regulatory or contractual impacts on oil projects in the North Sea, although international companies could have more trouble moving non British workers in and out of the region. But Scottish independence would mean a change of sovereignty of the oil fields themselves. In this sense, the Brexit vote is a massive turn of events for companies operating in the North Sea.

No Fed rate hike. Another consequence of the Brexit vote will be the U.S. Federal Reserve’s decision not to raise interest rates anytime soon. The Fed had already deferred on a rate hike in June, but was considering an increase in the near future. Now, with the dollar appreciating, financial turmoil in Europe, and weak jobs data in the U.S., there are fewer reasons for the Fed to increase interest rates in the near-term. Looser monetary policy will provide a bit of a countervailing force to the stronger dollar and falling oil prices.

Volkswagen agrees to pay $10.2 billion for U.S. emissions scandal. Moving on from Brexit news… Volkswagen agreed to settle claims related to the emissions scandal in the U.S. that emerged in 2015. The German automaker will pay $10.2 billion to compensate the 482,000 owners of diesel cars that had software programmed to cheat emissions tests. The settlement does not resolve all claims against the company, but only those for two-liter cars. There is still the issue of three-liter cars as well as potential fines from U.S. regulators. Related: EIA Reports Another 900,000 Barrel Draw On US Crude Stockpiles

Credit harder to find in the oil patch. U.S. regulators estimate that the value of bad energy loans from major U.S. banks has reached $34.2 billion. Banks are increasingly turning away from the energy sector when issuing loans, making credit harder to come by for U.S. drillers. Distressed companies are all but locked out of the debt markets, and for companies that still can obtain financing, credit lines are significantly reduced from years past. For example, according to a top executive at JP Morgan’s commercial banking business, large banks would have easily issued a $3 billion credit line to an oil driller back when oil prices were $100 per barrel. But a similar arrangement would be topped off at $600 million to $1 billion today, the Houston Chronicle reported in mid-June. Stingier lines of credit could prevent a rush to new drilling even if oil prices rise, making a sharp resurgence in shale production unlikely.

Offshore still moving forward. Major offshore oil projects in the Gulf of Mexico are coming online, helping to offset the production losses in the U.S. shale patch. The Wall Street Journal estimates that about 500,000 barrels of oil from new offshore projects is set to come online in 2016 and 2017. These projects were planned years ago and are only now coming to fruition, so they do not necessarily reflect today’s market conditions. But they do help to stem the output losses, although, at the same time, new output could slow the adjustment to a market balance, helping to keep a lid on oil prices.

In our Numbers Report, we take a look at some of the most important metrics and indicators in the world of energy from the past week. Find out more by clicking here.